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Thursday, December 9, 2021

Irish prosperity overstated by EU rankings, says former Central Bank governor Honohan

Ireland is not one of the most prosperous countries in Europe, but actually ranks below average once distortions in economic data are accounted for, according to former Central Bank governor Patrick Honohan.

In a new economic letter published today by the Central Bank of Ireland (CBI), Prof Honohan says that Ireland has “an unrealistically high ranking” in international comparisons due to the use of misleading GDP figures and relatively high prices in the domestic economy.

He says although Ireland ranks second in the EU 28 behind Luxembourg using GDP measures, the country falls to eighth according to GNI* – modified gross national income – a statistic preferred by the Central Statistics Office (CSO).

According to ‘actual individual consumption’ (AIC), an alternative indicator of household welfare, Ireland actually sits below average in the EU, with an AIC of 95pc of the EU average, down from 115pc in 2006-2007.

That result places Ireland at 12th – below the UK and all six of the founding members of the European Economic Community, as well as Austria and the three Nordic member states.

Prof Honohan’s letter tries to take account of statistical distortions when comparing average economic prosperity across different countries.

It is well understood in Ireland that gross domestic product (GDP) is a limited proxy measure for overall wealth and spending power because the activities of multinationals and aircraft leasing companies are included.

However, GDP is still the preferred measure for bond investors who fund government spending, since the figure captures the entire taxable economy within a country.

Prof Honohan argues that AIC removes the artefacts of Ireland’s position as a global trading platform for certain large industries and focuses on the actual current living standards of households, adjusted for price differences.

The result, he says, is that Ireland ranks “a lot lower than is commonly presumed” – above eastern European states and most Mediterranean EU members, but definitely not in Europe’s top tier.

Surprisingly, the country’s relative ranking is even lower today than in the late 1990s, indicating the long-term economic damage caused by the financial crisis.

Government austerity, higher taxes and prices 27pc higher than the EU average are largely responsible for that change, Prof Honohan says.

“No wonder many questioned the quality and extent of economic recovery even before the pandemic hit,” he writes in the letter.

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